Taxation of the Digital Economy in Europe

1. Introduction

Due to increasing digitalisation, but also due to the COVID-19 pandemic, profound changes are taking place in all areas of life. For companies, this offers the possibility of supplying their services via the internet to consumers all over the world without having to be physically present in the recipient country. Traditional tax links/presence (“Steueranknüpfungspunkte”) such as domicile, habitual residence or registered office and place of management are no longer tangible due to the applications of the World Wide Web.

2. Proposals at international level (OECD and EU)

The OECD already addressed the challenges of taxing the digital economy in October 2015 and discussed possible solutions. In 2018, the OECD finally published an interim report "Tax Challenges Arising from Digitalisation - Interim Report" and in 2019, the Inclusive Framework Secretary even released specified proposals for solutions in consultation papers (Pillar One and Pillar Two). Although the aim is to reach an agreement among the members of the Inclusive Framework by mid-2021, concrete implementation steps for a common solution still remain open.

In addition to the OECD, the EU is also addressing the challenges of taxing the digital economy. In March 2018 - shortly after the publication of the Interim Report by the OECD - the European Commission (EU Commission) presented two proposals for directives, a recommendation and a communication ("Digital Taxation Package"), to the Council and the European Parliament, which are intended to ensure the taxation of the digital economy and digital business models. In addition to the proposal for a directive on digital presence (so-called "digital permanent establishment"), the Commission also presented a proposal for a directive for a kind of "interim solution" for a common system of a digital tax ("Digital Tax Directive"). According to the EU proposal for a Digital Tax revenues from

• the placing on  a  digital  interface  of  advertising  targeted  at  users  of  that interface,
• the provision of a multi-sided digital interface for users and
• the transmission  of  data  collected  about  users  and  generated  from  users' activities on digital interfaces

shall qualify as 'taxable revenues' and therefore be subject to a 3% tax rate if certain thresholds are exceeded by an entity. Only entities whose total amount of worldwide revenues reported by the entity for the relevant financial year exceeds € 750 Mio. and whose total amount of taxable revenues obtained by the entity within the Union during the relevant financial year exceeds € 50 Mio. shall be subject to tax.

3. Unilateral implementations in selected countries in Europe

Due to the disagreement on a Europe-wide digital tax, about half of all European OECD countries have either announced, proposed, or implemented a digital services tax. The following table provides an overview of current developments of a digital service tax in some selected countries in Europe, which are (largely) based on the EU proposal, but different in details:

Furthermore also Belgium and Slovakia have recently published proposals to enact a DST, and Latvia, Norway, and Slovenia have either officially announced or shown intentions to implement such a tax.

4. Conclusion

Despite unanimity within the OECD and EU on the necessary introduction of a long-term, a common solution for the digital taxation seems far away. The unilateral measures of the individual countries can be described as an interim solution until a common regulation is found at the level of the OECD or at least at EU level. In the long term, a tax link/presence (“Steueranknüpfungspunkt”) for international digital companies without a physical presence in the member states is essential for fair taxation.

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